Walter Marlowe on Greece

One of the world’s smallest and least “linked”, least “integral” economies has the potential to bring on a second (and potentially more devastating) world financial system crisis than we experienced in 2007-2008.

Greece has “got the sunshine” (to paraphrase the Beach Boys) but so does California and lots of other places and unfortunately it really has nothing else either the world or Europe in particular needs.

It is not geo-politically critical (pretty sure old Henry Kissinger the father of geo-politics would agree). It is not resource rich and it is not quite a creditor to the rest of the world.

How did this happen?

The Euro was ill-conceived, economically and socio-economically and I don’t think anyone, even the most hardened Eurocrat or the vainest, most self-regarding Euro politico is prepared to argue against that any longer.

If the USA was not one country but just 48 geographically contiguous countries and say New York decided to promote a currency union with perhaps Connecticut, New Jersey, Massachusetts maybe even California and Illinois would they, as a group, ever ask Mississippi to join in?

The viability of the Eurozone (not just its survival but its effective functioning) could have been greatly improved by restricting the Euro to Germany, France, the Netherlands and Finland. The Euro was inappropriate for Ireland because it left the Irish with no interest rate mechanism for preventing an industrial based boom from morphing into a real estate bubble.

Greece, along with Portugal, for example, were failing economies even before joining the Euro.

Without a unified governance, economic and social system similar to that of a nation state like the US how could anyone have thought it appropriate to have Greece and Portugal in a currency zone along with Germany, the Dutch and the Finns.

Where will this end? Only Zeus knows. What we do know is:

The Greek bail-out package as currently structured is a Versailles Treaty for Greece (see my blog of March 25) – it is unsustainable and can only result in a continuing downward economic spiral for Greece

Without growth and recovery how will the Greeks ever pay back the bail-out funds? (not to mention the LTRO funding provided to Greek banks by the ECB). The Greeks don’t have to leave the Euro to create a repayment problem, they can just as well stay within the Eurozone and die on their feet

European banks, which are already on the LTRO life support system, are estimated to face a Euro 100 billion write down of their exposure to Greece if Greece were to revert to the drachma. Their vulnerability is just as great if Greece stays in the Euro and spends years dragging itself and the EU down

Not all Trojan Horses look alike, but it appears they are all filled with Greeks.

Walter is a US investor living in London. He is the author of the forthcoming Thematic Investing (to be published by Searching Finance 2012).